New York-Area Governors Plan to Sue Over Federal Tax Law -- Update

By Kate King Features Dow Jones Newswires

The governors of New York, New Jersey and Connecticut said on Friday that they would sue the federal government to overturn the new U.S. tax law, saying the measure unconstitutionally discriminates against Democratic-leaning states.

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The three governors, all Democrats, said they would file the lawsuit in federal court in several weeks. The legal action will argue that the new tax law's provision capping state and local tax deductions at $10,000 infringes on states' rights and amounts to double taxation, the governors said in a joint conference call Friday.

"In so many ways these changes discriminate against our state, against our economy, against the individual citizens who live within our state," Connecticut Gov. Dannel Malloy said.

The courts have given Congress wide latitude in tax policy, which could complicate efforts to prove that it overstepped in crafting the new tax law.

The federal law, which will affect 2018 tax returns, lowers tax rates on individuals and businesses and raises the standard deduction. It also caps state and local tax deductions at $10,000. People in the three states who pay more than that amount would end up paying more in their federal taxes.

New York Gov. Andrew Cuomo said "there is a very strong argument" that the new tax law violates the U.S. Constitution's equal-protection clause by disproportionately affecting residents in states that typically vote Democratic. Capping state and local tax deductions could cost New York taxpayers an additional $14.3 billion a year in federal taxes, according to a preliminary report by the state's Department of Taxation and Finance.

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Mr. Cuomo said the states' lawyers would look for communications between Republicans or members of Mr. Trump's administration that proved they intended to discriminate against Democratic-leaning states.

"All you need is one email that says, 'These are Democratic states and therefore we can get it passed,' " Mr. Cuomo said, referring to the tax law. Then "you have a targeting for political reasons, and now you're off to the races."

Erik M. Jensen, a professor emeritus of law at Case Western Reserve University in Cleveland, said the discrimination argument would be difficult to prove, in part because "courts typically don't want to second-guess the motives of Congress."

As far as double-taxation, judicial decisions in the past interpreted the Constitution as limiting the extent to which Congress could impose taxes on state and local governments, but that doctrine has gradually eroded over the past century and by now has "pretty much disappeared," Mr. Jensen said.

"I'm really skeptical about whether litigation like this is going to go anywhere," he said.

The U.S. Treasury Department and White House didn't immediately respond to requests for comment.

Congressional Republicans have said the tax law would lower the tax burden on people in most brackets.

The tri-state region's three governors said they are confident they have a strong case and, in the meantime, would also continue to pursue other work-arounds to the new tax bill.

New Jersey Gov. Phil Murphy, who just took office this month, said the state is looking to allow homeowners to receive state tax credits for contributions to local charitable funds, which could be deducted from their federal tax liability, and also considering a payroll-tax overhaul first floated by Mr. Cuomo.

Mr. Murphy said the federal tax law's capping of state and local tax deductions "has nothing to do with sound policy."

"It's clear it's politically motivated," he said. "It's punishment of blue states like New Jersey, New York, Connecticut and others."

The Treasury Department has said it is skeptical about the idea of letting taxpayers make charitable contributions as a workaround to the new law.

Write to Kate King at Kate.King@wsj.com

The governors of New York, New Jersey and Connecticut said on Friday that they would sue the federal government to overturn the new U.S. tax law, saying the measure unconstitutionally discriminates against Democratic-leaning states.

The three governors, all Democrats, said they would file the lawsuit in federal court in several weeks. The legal action will argue that the new tax law's cap on state and local tax deductions infringes on states' rights and amounts to double taxation, the governors said in a joint conference call Friday.

"In so many ways these changes discriminate against our state, against our economy, against the individual citizens who live within our state," Connecticut Gov. Dannel Malloy said.

The courts have given Congress wide latitude in tax policy, which could complicate efforts to prove that it overstepped in crafting the new tax law.

The federal law, which will affect 2018 tax returns, lowers tax rates on individuals and businesses and raises the standard deduction. It also caps state and local tax deductions, which had been unlimited, at $10,000. People in the three states who pay more than that amount would end up paying more in their federal taxes.

New York Gov. Andrew Cuomo said "there is a very strong argument" that the new tax law, which passed with no Democratic votes in either the House or Senate, violates the U.S. Constitution's equal-protection clause by disproportionately affecting residents in states that typically vote Democratic. Capping state and local tax deductions could cost New York taxpayers an additional $14.3 billion a year in federal taxes, according to a preliminary report by the state's Department of Taxation and Finance.

Mr. Cuomo said the states' lawyers would look for any communications between Republicans or members of the Trump administration that would indicate an intent to discriminate against Democratic-leaning states.

"All you need is one email that says, 'These are Democratic states and therefore we can get it passed,' " Mr. Cuomo said, referring to the tax law. Then "you have a targeting for political reasons, and now you're off to the races."

Erik M. Jensen, a professor emeritus of law at Case Western Reserve University in Cleveland, said the discrimination argument would be difficult to prove, in part because "courts typically don't want to second-guess the motives of Congress."

As far as double-taxation, judicial decisions in the past interpreted the Constitution as limiting the extent to which Congress could impose taxes on state and local governments, but that doctrine has gradually eroded over the past century and by now has "pretty much disappeared," Mr. Jensen said.

"I'm really skeptical about whether litigation like this is going to go anywhere," he said.

A spokesman for the White House called the states' planned litigation "a ridiculous, meritless publicity stunt by governors trying to blame the president for their high taxes and anti-growth policies." The Treasury Department didn't respond to requests for comment.

Congressional Republicans have said the tax law would lower the tax burden on people in most brackets. They also have said the previous unlimited deduction cost the federal government too much money and fostered bigger spending by state and local governments.

Four House Republicans from New York and one from New Jersey voted in favor of the tax bill.

The tri-state region's three governors said they are confident they have a strong case and, in the meantime, would also continue to pursue other work-arounds to the new tax bill.

New Jersey Gov. Phil Murphy, who just took office this month, said the state is looking to allow homeowners to receive state tax credits for contributions to local charitable funds, which could be deducted from their federal tax liability, and also considering a payroll-tax overhaul first floated by Mr. Cuomo.

Mr. Murphy said the federal tax law's capping of state and local tax deductions "has nothing to do with sound policy."

"It's clear it's politically motivated," he said. "It's punishment of blue states like New Jersey, New York, Connecticut and others."

The Treasury Department has said it is skeptical about the idea of letting taxpayers make charitable contributions as a workaround to the new law.

Write to Kate King at Kate.King@wsj.com

(END) Dow Jones Newswires

January 26, 2018 16:12 ET (21:12 GMT)